Consumer Spending Rises Strongly In US In July

U.S. consumer spending increased solidly in July, pointing to strong economic growth early in the third quarter, while a measure of underlying inflation hit the Federal Reserve's 2% target for the third time this year.

Strong domestic demand, rising inflation and a tightening jobs market likely will keep the U.S. central bank on course to increase interest rates for a third time this year in September.

The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.4% last month after advancing by the same margin in June. Households spent more at restaurants and on accommodation last month.

There was also an increase in spending on prescription medication. Economists polled by Reuters had forecast consumer spending rising 0.4% in July.

With demand strong last month, prices continued their gradual upward trend. The personal consumption expenditures (PCE) price index excluding the volatile food and energy components rose 0.2% after edging up 0.1% in June.

That lifted the year-on-year increase in the so-called core PCE price index to 2.0% from 1.9% in June. The core PCE index is the Fed's preferred inflation measure. It hit the U.S. central bank's 2% inflation target in March for the first time since April 2012.

Economic Growth

Strong consumer spending helped fire up economic growth in the second quarter, with gross domestic product rising at a 4.2% annualized rate, the fastest in nearly four years and almost double the 2.2% pace notched in the January-March quarter.

Solid consumer spending should blunt some of the impact on the economy from an anticipated widening in the trade deficit and weakness in the housing market in the third quarter. Recent data showed a sharp rise in the goods trade deficit in July as well as further declines in home sales and a moderate rise in homebuilding last month.

Consumer spending, which grew at a 3.8% annualised rate in the April-June period following a pedestrian 0.5% pace in the first quarter, is being supported by the labor market, which is viewed as being near or at full employment.

News by Reuters, edited by ESM. Click subscribe to sign up to ESM: European Supermarket Magazine.